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If Kleiner Perkins loses, who pays?

Ellen Pao arrives at San Francisco Superior Court in San FranciscoEllen Pao arrives at San Francisco Superior Court in San Francisco
Ellen Pao at San Francisco Superior Court on March 3, 2015.Photograph by Robert Galbraith — Reuters

Ellen Pao vs. Kleiner Perkins moves into the closing argument phase today, after which it heads to the jury. Barring a last-minute settlement — which seems highly unlikely — that means we should have a verdict by the weekend.

I have absolutely no idea what the jurors are thinking, but let me briefly play out worst-case for Kleiner Perkins. It seems that Judge Kahn’s weekend ruling on punitive damages means that the VC firm could be on the hook for a whopping $160 million.

Pao sued the management company, rather than individual funds, and LPs tell me that they would not be required to pay any of a guilty verdict (namely thanks to LPA carve-outs for internal firm disputes, as opposed to the firm being sued by a portfolio company or other third-party entity). KPCB does have some insurance for this sort of thing, but legal sources say they’ve never heard of VC firms having insurance that even approaches the $160 million figure.

So who pays? This is where things get pretty murky. KPCB has a management company that collects fund fees, but even 2% annually on committed capital for its four most recent funds would only work out to $57 million per year (and, again, it isn’t still earning 2% on the full commit from an invested 2010 vehicle).Plus, a lot of that money is needed to keep the lights on, pay employees, etc. So my best guess is that there would be some sort of clawback situation, although it’s unclear how expansive that would be. Would it only apply to those who were with KPCB at the time of the alleged offenses? Or just those there now? If the former, would that include Ellen Pao herself?

Perhaps the only ones paying out of pocket would be the LLC’s actual three owners, which SEC registration docs list as John Doerr, Ted Schlein and Brook Byers. Or (big longshot) could the LLC file for bankruptcy, with a new LLC being formed to house the funds?

And, of course, all of this is predicated not only on a massive loss in this round, but also on losing an almost-certain appeal. So yes, we’re getting way ahead of ourselves. So let’s maybe revisit in a few days.

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